Ottawa is stitching together a $1-billion lifeline for the forest industry designed to rescue pulp producers from the devastating effect of billions of dollars in subsidies from Washington to their U.S. rivals.

The details of the Canadian aid package are still being worked out, but the direction is clear: to offset the impact of up to $8-billion (U.S.) in “black liquor” subsidies to U.S. pulp producers. It will also attempt to prevent blowback from the hard-line U.S. softwood lumber lobby, which is quick to press Washington for trade action against anything that resembles government subsidies for Canadian forest companies.

To prevent retaliatory trade action, Ottawa will focus on ways to help forest companies become more environmentally efficient, including green power projects and cogeneration plants that produce both heat and electricity. In theory, such a package would be in keeping with the 2006 Canada-U.S. softwood lumber agreement's “safe harbour clause,” which allows government assistance to forest firms for “forest or environmental management, protection [and] conservation” if it does not affect timber prices. The thinking in Ottawa is that it would be a stretch for the Americans to argue that environmental spending at a pulp mill significantly affects the price of lumber.

Just one week ago, the federal government put the finishing touches on a $10.6-billion (Canadian) bailout of auto giant General Motors – a move that the forest sector used to bolster its argument for aid to counterbalance U.S. subsidies.

Government officials caution that timing of an announcement is still uncertain. Industry has been pressing for action as early as this month, but the proposed aid, working its way through Ottawa's decision-making system, has not cleared all hurdles. The last step in the process is typically cabinet approval for funding.

Steve Outhouse, acting director of communications for Natural Resources Minister Lisa Raitt, said he couldn't comment on “any specific plans that may be in the works.” But he said the Harper Conservatives are “determined to minimize the adverse impacts of this [black liquor] measure on our domestic forest sector” and are working with industry in considering options.

British Columbia Forests Minister Pat Bell said that while his government would prefer no subsidies at all, B.C. would support the federal government taking action as long as the softwood lumber trade agreement is not threatened. Premier Gordon Campbell last week warned that any move to match U.S. subsidies would imperil the agreement.

Federal assistance cannot come too soon for Canada's beleaguered pulp producers, which have already begun to shut down operations. Pulp prices have fallen dramatically since Washington began effectively underwriting more than a third of U.S. companies' costs. The result in Canada has been hundreds of lost jobs, with thousands more at risk.

A counterbalancing Canadian effort will help restore some of those jobs, but the industry has already been damaged, said the head of Fraser Papers Inc., which is laying off a quarter of its work force. “We needed it three months ago,” said Jeff Dutton, president and chief operating officer of Fraser.

In late 2008, U.S. forest companies gained access to a federal tax credit meant to encourage alternative fuels and later expanded to include the energy that Alaska seafood processors generate from fish oil. U.S. pulp producers claimed the credit by adding diesel when burning black liquor, a remnant from the chemical processing of wood pulp that is used as fuel.

U.S. pulp companies began receiving the subsidies at the start of the year, allowing them to slash prices – and putting their Canadian rivals at a severe competitive disadvantage.

Rick Jeffery, president and chief executive officer of the Coast Forest Products Association in British Columbia, said he has been told that an aid package is imminent. However, he said the plan as described to him has a “fundamental flaw:” It excludes firms that use mechanical means to make pulp, meaning that only part of the Canadian pulp industry would receive assistance.

Marta Morgan, vice-president of trade and competitiveness for the Forest Products Association of Canada, said it is important that any initiative not trigger a trade complaint from the U.S. government. But she said she is sure that the softwood lumber lobby will follow its typical pattern of aggressively defending its interests.